As part of a deferred prosecution agreement, JP Morgan agreed on Tuesday to pay $1.7 billion in penalties for its role in the Madoff debacle. Federal prosecutors, led by US attorney Preet Bharara, alleged that the international bank repeated ignored signs that Madoff was running Ana Ponzi scheme, favoring short-term profits over its legal and regulatory obligations.

JP Morgan will also pay $350 million to the Office of the Comptroller of the Currency, an independent bureau within US Treasury that regulates national banks, and $543 million to a court-appointed trustee seeking to recover lost assets for Madoff victims, taking the total to just under $2.6 billion.

These were serious allegations. JP Morgan was Madoff’s bank. In that sense, they were “ground zero” for all of the criminal activity that transpired. It was in JP Morgan accounts that the fictional pyramid scheme was constructed and operated. Simply put, Madoff used the bank to launder his illegal proceeds.

Technically, the case was based on JP Morgan’s violations of the Bank Secrecy Act, which requires banks to notify authorities when they have reason to believe that illegal activities are occurring. In a statement released by the bank after the announcement of the settlement, JP Morgan admitted that it could have done better in connecting the dots involving Madoff and recognized the Ponzi scheme earlier. Importantly, though, the bank reaffirmed its belief that none of its employees knew about the scheme or knowingly assisted Madoff. In an interesting twist, the massive penalty will not be a tax deduction, so future tax returns filed will not be able to carry forward the loss to reduce their tax burden.

What was not obtained by Bharara and his fellow prosecutors, however, was a guilty plea to a criminal offense. Instead, based on the undertaking that JP Morgan would revamp its money laundering oversight procedures, Bharara conceded instead that he would defer any prosecution of the offense. In addition, no individual bank employees were prosecuted.

Thousands of people were deceived by Bernie Madoff as he conducted his fraud, seemingly beyond the reach of the law, for many years. And in that time, the fraud grew and grew, as did the magnitude of losses that victims would suffer when the elaborate construction of lies collapsed.

However, one of the most important lessons to emerge from the Madoff debacle was that when adequate due diligence was conducted and the right questions asked (but then not fully or properly answered by Madoff), would-be investors balked. The numbers didn’t add up, so astute investors walked away.

Which takes us to the heart of the prosecution’s case here. Signs of fraud should not be ignored. It is not acceptable (nor legal) to maintain willful ignorance when reasonable inquiry, and standard procedures for accumulating and sharing information around a bank, would have revealed criminality at an earlier stage.

Some will claim that by simply writing another check, JP Morgan got off easy. From this perspective, only a full blown criminal prosecution would do. However, such a conviction could have had devastating effects on the bank and on the international financial system as well. Remember Arthur Andersen?

Equally importantly, when parties walk into a court room, there is no guarantee who will win, regardless of the sense of certainty that either side possesses. Trials can be expensive and unpredictable. The elements of financial crimes are often complex and difficult for a jury to follow. By agreeing to a deferred prosecution agreement and a hefty fine, Bharara went for certainty.

The most important asset any financial institution has is its reputation. It is on the basis of this reputation that it transacts its business in the market each day. Its ability to recruit and retain talented individuals is also directly impacted by its reputation.

In the future, senior management in banks will know very clearly that red flags when they arise cannot be ignored. Results that are appear “too good to be true” may or may not be true, but the suspicion that such appearance naturally causes in a reasonable observer must be reported to proper authorities.

The costs of turning a blind eye are just too great.

The author's book, "ONE STEP AHEAD - Private Equity and Hedge Funds After the Global Financial Crisis," is published by Oneworld and is available in bookstores across the United States and Britain.